At sixes and sevens with Microsoft Licensing 6.0

Or, how Microsoft killed the radio upgrade star

Microsoft's License and Software Assurance model, dubbed Licensing 6.0, has not been met with open arms. As with most things relating to Microsoft licensing, the primary issue is cost. We reported back in October of last year that Microsoft's new scheme was met with resistance, so much so that the company extended the deadline for sign-on and started taking criticisms into account. The deadline to hop on board passed on August 1st, and while analysts were eager to hear from MS about final sign-up rates, Microsoft wasn't saying too much about the success (or lack thereof)
of the program. Now the company has formally recognized that the scheme wasn't "easy to understand," and in some cases costs companies more money.

So what gives, and should you be concerned? Licensing 6.0 is geared towards term commitments (e.g., 3 years) for those with considerable software expenditures (250+ desktops, for example). It's not for standard home users, or even for small business (yet!). All you home users need not fret, OK? (At the moment, at least; we'll get back to that).

The new licensing program was more or less a "replacement" for Microsoft's older volume-licensing agreements, a replacement that is attempting to fuse software subscription ideology with mass licensing. Yep, this is step one in moving to a software-subscription model. Understand: this is ultimately about annualizing software costs and budgeting, both for IT shops in big biz and for Microsoft.
No matter what changes Microsoft makes to the license to counter-act its poor reception, this key feature is likely to remain.

So what's the rub? Traditionally, of course, a big business gets special pricing on software. Being part of the "Select" program, for example, means you get your software from Microsoft at a much cheaper rate that the guy who lives next door, and with products such as Windows XP, you get Windows Product Activation disabled. It also means, of course, that you buy in volume, and when it comes time to upgrade, you get a pretty good price on that, too. In the past, if you had 5000 licenses for Windows 2000 (which you purchased far below retail) and wanted to upgrade them all to Windows XP, you would have paid a special reduced upgrade cost, typically somewhere in the neighborhood of 25% of the full license cost. If Microsoft has their way, those days are dead.

With 6.0, if you aren't part of Software Assurance, you don't get "upgrade pricing." At least, you don't get the deals you used to get. Instead, you pay the full license cost for your level of licensing. In a sense, then, it's like licensing another OS for another computer: you previous license is irrelevant. You licensed Windows 2000 Professional for 2000 users, and want to upgrade? You now pay the full volume price for those 2000 computers, which means you pay about 300% more than you used to for an "upgrade" (again, only if you are not part of Software Assurance).

So you can see why one might, at first, want to jump on board with Software Assurance (SA) at first. The SA package fee is based on both time and on butts (CALs), connections, or karate-chops (ok, maybe not the last part). The licensing side of the deal offers three
options: Open License, Select, and Enterprise. These are more or less the traditional volume licensing tiers, save
for the fact that they contain no special upgrade licenses in-and-of
themselves. That's where Software Assurance comes in: if you're interested, you sign up for the flavor/duration you "want," and you get all the upgrades you need during that timeframe, for an annual fee of circa 20% of your total licensing cost. See the magic at work? No SA equals no upgrade pricing. SA = "free upgrades," but a 20% annual fee payable to Microsoft.
(For more granular details, check this out, or you can also try to make headway into Microsoft's official information.) The actual percentage changes according to plan and negotiation, from what we've learned. Curiously, this month Microsoft launched a 0% Interest, 24-month financing plan for Software Assurance plans.

So, why does this eek some IT managers? The issue here is what we call "maintenance." Most higher-end commercial software packages offer, on top of the regular license, an additional "maintenance fee" that grants you any and all upgrades during a certain period of time. Keep in mind, oh zealots, that this includes Sun, SGI, and HP. Usually that fee is less than what you would normally pay if you simply waited and bought an upgrade. This should make you want to join up with Software Assurance ASAP. But...

If you're in IT, then you can probably already see the problem: most shops don't actually upgrade their software every time a new version comes out. Why pay for three years of upgrades when you're planning on staying on Windows 2000 for another two years, and you've already licensed it? Ditto Office, ditto Windows 2000 Server, ditto et cetera. Of course, the cynical reader would point out that Microsoft's decision to "drop support" for older OSes may ultimately be their way of bullying IT shops into the program, but I can't see that happening because the timeframe is too small. And hey, three years is an awfully small timeframe when you're talking about client computers. In my experience, changing the desktop and the Office suite of a user is a rather traumatic thing for the less savvy, and it's certainly not
something you would do more than once in three years in a larger corporate environment.

I should also like to point out that maintenance from companies like SGI et alia typically includes hardware support as well, which Microsoft is obviously not offering.

Let's add another wrinkle. To even join Software Assurance, you need to be current on all your software. It's not like you can run a shop full of Win95 clients and get SA and then upgrade them all to WinXP for 20%. Nope, you have to be current before you join. While you, me, and grandma might be running pretty current stuff, many big business are not, because rollout costs are prohibitive to the upgrade cycle. To hop on SA, a company might need to spend a great amount of money just to be current with licensing, before even "qualifying" for SA. And then what? They get to spend the next year rolling out those current licenses, while spending 20% on the annual fee that gives them access to stuff they won't consider for another two years at most.

In the end, the once circa 25% upgrade cost has become a circa 20% entitlement to an upgrade that you very well might not even use.

With Microsoft acknowledging that many IT people failed to take to the program, I suspect that Licensing 6.0 may reach 6.5 or 7.0 before too long. A survey of IT managers in Australia, for example, showed that 55% of those surveyed were considering MS alternatives as a result of these changes. In a March survey by Sunbelt software, 38% said they were actively looking for a way out, and 42% of respondents to an InfoWorld poll said they were planning on switching, too. This would have been a swell time for companies like gobe software, with their impressive
gobeProductive office app, to start a blitzkrieg of branding campaigns. Too bad.

I'm not convinced that Licensing 6.0 is a sinister scheme. Indeed, annualizing software costs makes sense for a company like Microsoft who otherwise has to ride a rocky revenue stream that flutters and booms with the releases of major software titles. And in my other life as an IT consultant, I've encountered more than one business who was very interested in Software Assurance for that same reason: it annualized (and thus made predictable) their software licensing costs. The #1
cause of hesitancy that I have encountered so far is not the annualized cost, but the requirement to get current on licenses now. I suspect that we'll see changes in that requirement before too long.

The question of how all of this relates to software subscriptions for home users is an interesting one, but I'm not sure that this same kind of model would be applied to the home. Volume licensing is a different beast altogether, and Microsoft has been able to leverage their volume discounts in such a way as to make SA somewhat attractive. To make this work (i.e., make it attractive) for the end user, original acquisition costs would have to be greatly lowered. A cynic would suggest that Microsoft will merely flip a switch and make an SA-like package required for consumer purchases, but I don't think Microsoft is in a position to do this, as the above polls indicate. At the same time, Product Activation is available on consumer copies of most Microsoft products already, and this technology could be easily
extended to enforce a pay-to-play model should they go that route. Either way, I suspect that the lessons learned from the lack-luster launch of 6.0 will steer them away from this, because in the end the success of their model will boil down to cost acceptance, because the market simply can't pretend that there aren't other, freeoptionsfortheenduser.